By Doug Katz – 06/16/2022
The National Association of Home Builders (NAHB) recently conducted a poll regarding the confidence of builders in the future housing market. The outcome was not encouraging. In all three components of the poll, current single-family homier sales, future single-family home sales and traffic of prospective buyers, builders were pessimistic about the market. Aside from the buyers behavior, inflation and other considerations like raw material and labor costs, are tempering builders decisions to pursue new projects. According to the Chief Economist of NAHB, Robert Dietz, materials are up just under 20%. When buyers purchasing power is eroding from higher rates and inflation for essentials, the ability to price these costs into the home become less viable. Many builders also keenly remember the pre-2008 market when building of new homes was happening at a breakneck pace to keep up with demand at the time. When the bubble burst, it did not go well for them and now they are worried that if they build it, they may not come.
From the consumer side, there is a problem that the builders poll did not address. New home construction generally depends on buyers committing to buying a home when complete, which can take months. While the lending industry has long term locks, often these lock periods are insufficient to cover the time for construction and, if they do, they are expensive adding cost to the buyer’s transaction. Additionally, new home construction is known for frustratingly changing timelines, especially when raw materials and labor are a problem. This makes a long-term lock a precarious choice as a few delays can blow the lock and cost the buyer extensions. If they wait until they are within the more standard lock periods, generally 90 days, they face huge uncertainty on where their rate and, in turn, their payment will be. I speak with homebuyers all the time who are freaked out and panicked about where the rates will be when they can lock. The worst part is that there is no answer and demand for new homes suffers.
In a typical market, this would not be a huge problem, but we are not in a normal market. One of the factors that has driven home prices up at a record pace has been a supply issue. Based on some reports, the housing market would need as much as four million new homes New construction is a key component of expanding the housing stock. The hopes of many associated with the market was that prices would stabilize and supply would catch up to demand. A slow down or pause in new home construction keep supply tight and prices high.
This is a good indicator for sellers as it may have bought some time to harvest the best return if they are selling. They are as dependent on the housing supply and continued scarcity is good for them. Like anything, however, this scarcity will not last and nobody can predict when the inflection point will occur, The best thing for prospective sellers can do right now is get into the market, especially if their personal timeline for things like downsizing empty-nesters or a court order, such as a marital settle agreement, requires that they sell. The market will not likely get better, so inaction will likely cost them.